Published 6:15 am, Wednesday, January 2, 2013

In the Advisory Services Group at Wells Fargo Advisors, we do not like to guess; ever. We work hard doing the fundamental research and analysis necessary to form opinions and develop investment advice that our clients can use in constructing their portfolios and planning for retirement. But sometimes we all have to do things we do not like. One of those times is now. We need to guess what will happen in the "fiscal cliff" negotiations as we move into the final days of the year.

Congress and the president plan to come back to Washington on for several days of hurried negotiations, trying to beat the Jan. 1 deadline when tax hikes and spending cuts automatically kick in. Will a deal get done? We continue to believe something will get done. But a "grand bargain"? Hardly. The most likely outcome is for tax increases on a minimum number of top wage earners and minor spending cuts for limited number of government departments, which will affect a small number of industries. In other words, most of the tough decisions get kicked down the road for another day.

But there are other possibilities. For instance, Congress and the president could delay making decisions on any of the tax increases and spending cuts by kicking the entire can down the road for a year or so. The argument in support of this scenario would be that the economy is simply too weak to be able to absorb any tax and spending adjustments right now. Of course, this would assume the economy would be better off in a year than it is currently. We do think the economy will be slowly improving over the course of 2013 but the reality is, once again, our elected officials are squeamish over making decisions that some of their constituents might not agree with such as cuts in entitlements and increased taxes. So the weak economy excuse is largely just a way to avoid making unpopular fiscal decisions.

In fact, the pesident last week encouraged leaders of both parties to come up with some sort of interim compromise that would prevent the economy from rolling over the cliff and then come back to the table later for more substantial negotiations. This would buy some time in the near term and be the easiest way out for Congress. It would benefit both parties and have the blessing of the president.

There are at least several different credible paths that the fiscal cliff negotiations could follow. Under almost any scenario, Congress would need to come back at some point and attempt to hammer out a more meaningful agreement that would hopefully begin to address the longer term fiscal issues facing our nation. In the near term however, just about anything could happen. We think the market has been prepared for some time for the cliff negotiations to linger into the new year before a final decision is made. In the end, and despite all the time this strategist has spent trying to analyze the situation and figure out what will actually occur, your guess is as good as mine.

Past Performance is no guarantee of future results. This article was produced on Dec. 26, 2012 by Scott Wren, Wells Fargo Advisors Senior Equity Strategist, and provided courtesy of Bhupen Agrawal, Managing Director - Branch Manager of Wells Fargo Advisors' Midland office, at 684-7335. The material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy or sell any security, or instrumental to participate in any trading strategy. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations. Additional information is available upon request at 684-7335. Wells Fargo Advisors, LLC, member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Investments and insurance products: NOT FDIC-Insured NO Bank Guarantee MAY Lose Value